Feb 5, 2019
CEO Mastery: Surviving a Startup’s Breaking Points
Open Advice from Former OpenTable CEO and Disney Executive Christa Quarles
In a career leading both startups and major corporations, Christa Quarles has learned a lot about what makes businesses grow and what makes them break. Both usually come hand in hand, in fact, Quarles has observed these moments in her most recent roles as CEO and, before that, CFO of Open Table. She was previously chief business officer of Nextdoor, has held a number of senior roles at The Walt Disney Company, and has worked in investment banking as a research analyst. Quarles also serves on the boards of Kimberly-Clark and Affirm.
Her banking experience has proven to be instructive. “My job was to meet with private company after private company to figure out which would be a successful IPO. I have the huge benefit of having studied hundreds of companies,” Quarles says. Lessons from those companies — paired with her own experiences — made up the basis for her talk, “How Startups Can Survive Their Breaking Points,” delivered at Spero Ventures CEO Summit for a curated group of promising early-stage entrepreneurs.
Quarles details her biggest lessons in running startups, informed by errors and red flags she learned to spot as a banking analyst. Here, she discusses the two phases of every company, why you probably haven’t sized your market properly and how to scale and keep growing even when it feels like you’ve hit a wall. Quarles also talks about the keys to stewarding your culture, the most critical employees within your own organization and how to think with both long- and short-term vision.
The Two Phases of Every Company
Quarles says every company’s life can be boiled down to two phases.
Phase I: Finding core product-market fit. Entrepreneurs spend a lot of time thinking about this. And it’s incredibly important, to be sure. “But your original product-market fit only gets you so far,” Quarles says. “What people don’t realize is that assessment of TAM [Total Addressable Market] is often the most critical piece. At some point there’s a record scratch. You won’t be growing as fast as before. That’s when you have to ask: Did you size the market correctly?”
Phase II: Scaling through invisible asymptotes. This is a saying of product executive Eugene Wei’s. It’s the point at which growth starts to flatten. The saying “characterizes lots of problems at big and small companies alike,” Quarles says. For Amazon, where Wei worked, the invisible asymptote was shipping costs: Those fees would be a limitation for growth. The company eventually launched free shipping and Amazon Prime.
“When I started at OpenTable, it was a white tablecloth restaurant reservation system. I found we had 60% penetration of the market. Well, there goes the growth. These S-curves you’re hopping on — at some point, you hit a shoulder and growth is not what you thought it was anymore,” Quarles says.
So what if you’ve hit that S-curve’s shoulder? Quarles has a five-step process for moving successfully up and past the Phase II ceiling.
Step 1: Reimagine Your TAM
Quarles first investigated ways to expand OpenTable’s TAM beyond their initial vision. She did this from the following angles:
- Broadening the user base. Quarles dug into the data and found that the casual dining restaurant P.F. Chang’s was a top 10 search query. “That told us our diners were looking for more everyday casual dining offerings. We began reimagining our TAM beyond just reservation-taking restaurants to waitlist-taking restaurants,” she says.
- Understanding the ‘how’ of the user experience. “We thought people used us for things like anniversaries where you reserve well in advance. In fact, we found that one in four people were making reservations within 90 minutes of seating time. That’s not a reservation, that’s a homing beacon for that ‘near me now’ dining experience,” Quarles says.
- Opening up geographic possibilities. The company dove into understanding how travelers, who visited OpenTable in high numbers, used the platform. “When I started, there was a different app in every single market. A search in New York for a London restaurant 404’d. No contemplation had ever been given to being a global company.”
- Consider business model fit, not just business model. “The business model is as important to the original product-market fit or expansion of the product-market fit as anything else.
“Think about the global use cases early so you don’t wind up with legacy challenges.”
Step 2: Chase What’s Broken
Once you scale beyond that flattened growth, celebrate, but also know that you’re about to encounter more problems. “Things are going to start breaking,” Quarles says. That’s normal for any company that’s growing. This is how she deals with it:
- Look for the breaks. “When are things falling apart? When are things having an issue? Because it means you have an opportunity. It means you’re in a hypergrowth space. So how will you post-mortem a break?” Quarles says. Answering these questions may help you identify new directions and processes for your business.
- Reactive leaning in. “Engineers hate banal processes. They’ll hate you forever. I’d just wait for things to not go so well,” Quarles says. Rather than instituting processes for the sake of them in fear of what might go wrong, simply let things go wrong — then lean into the problem and use it as an opportunity to create solutions that fit the challenge at hand.
- Don’t expect your finders to be your fixers. “My horizontal reports were really good at finding these breaks. But often the finder is not the person to fix it. Make sure you’re not telling people to not bring you problems unless they have solutions. Tell them, ‘No, bring the problems!’ Then you’ll be in a position for fixing.”
“Like a snake shedding its skin, you have to break in order to grow. Find and lean into the breaks.”
Step 3: Steer as You Grow
After you’ve chased down your breaking points and figured out your TAM accelerators, your work isn’t done. You’ve got to shepherd an entire organization through the growth spurt. To steer an evolving ship, focus on Quarles’s simple principles.
- Set fewer goals. Pick three to five, then ask how many people are focused on each. Make sure you’re allocating resources efficiently. “A certain percentage of people should be driving those metrics,” Quarles says.
- Lean on data with tight, measurable KPIs. “What’s the metric? What will you do with the metric?
- Make it OK to miss goals. Foster a culture of learning and growing. “It’s okay to be wrong, but it’s not okay to not know why,” Quarles says. “People should have testable hypotheses and a way to post-mortem failures when those theories turn out to be wrong.”
- Protect your horizons. “A company has multiple horizons: Future inflection points they must prepare for,” Quarles says. “Much attention is spent on horizon 1 objectives, but you have to also protect your horizon 2 and 3 initiatives. Those are your investments, your additional TAM accelerators. Those are how you’re going to scale those invisible asymptotes. Your horizons 2 and 3 opportunities will get eaten alive if you don’t protect them.”
Step 4: Curate Your Team
As you move beyond TAM expansion and goal-setting for your company’s new direction, it’s time to evaluate the team that’ll carry the new vision forward. Quarles asks herself these questions to keep the entire company together on the same track:
- How many managers are in the company at each stage? “Not just your managers. Beyond the Dunbar number, it gets more complicated. In the early days, you might be able to get away with a quick message via Slack to the team, that will no longer work as you scale. Regularly bring people into a room to take the pulse if you want to be successful hitting challenges and break points,” Quarles says.
- How is company communications designed? Quarles refers to Conway’s law, which states that organizations’ design systems are copies of their own communications structures. This was true at Open Table, where the company was split into a restaurant group that sold hospitality software and a diner group that handled the consumer-facing site. “People don’t realize we’re a B2B2C company. But we were split in two. We really became a reflection of how the organization communicated. I had to push those two pieces back together, all the way into the code so that we could be agile,” Quarles says. “Think about those communications things you’re doing. Recognize that there are deep implications further down the road if you don’t consider their impact.”
- How many first-time managers do you have? “We had a lot of field promotions. This person might be an extraordinary individual contributor. But they have no idea how to do a 1:1 or give radically candid feedback,” Quarles says. (She’s a big fan of the book Radical Candor.) Identifying this number may help identify possible breaks and areas where employees require more training in order to do their jobs well.
- How quickly can managers give you a status on their operations? “I’d ask simple questions and they’d be like, uh…and take a long time to come back. People should be dashboarding up their life, whether that’s writing their own SQL queries, they should be able to pull up information in a relatively short period of time. If they can’t do that, well, if something hasn’t already broken, then it’s about to break,” Quarles says. For example, Quarles and her team once missed a technical malfunction for a week, which is how long it took to show in a topline metric, because managers weren’t on top of their own, closer to the ground metrics.
- How many leaders are in the largest role they’ve ever had? “The person who took you from 0–50 is not the person to take you from 50–150, and the person who got you to 150 can’t take you to 500. Some people are unicorns and can leap through all this stuff, but most cannot. It’s one of the most heartbreaking things — it just may be too much for this one person. The kind thing to do is to move on,” Quarles says.
- Can executives think beyond their area? “I need my team to test me, to say, ‘This is a stupid idea.’ I require everyone on the executive team to not just be good at their vertical expertise, but to have a point of view on the whole organization,” Quarles says.
“Sell inside as much as you do outside. Our purpose and ultimately our brand is about whether the people inside believe in it.”
Step 5 (Continuous): Fortify A Strong Culture
People can only hold around 150 people in their head at any given point in time, Quarles says, citing the anthropology concept of Dunbar’s number. “Beyond 150 people means you have to start selling myth, legend and narrative about your company, otherwise known, in my opinion, as culture,” Quarles says. “As you grow, how you communicate radically changes.”
Her best tips for building and communicating in a growing company’s culture:
- Connect people with a mission. “The role of the CEO is to make sure everyone is connected with a purpose. Have a purpose and vision, and rearticulate it over and over,” Quarles says. “People will ask you about it again and again. They want to know: Do you still believe in it? Do you still believe you can climb that mountain?”
- Steward your culture. “Culture is not free lunch and foosball tables. It’s how people make decisions when you’re not in the room. You, as CEO, are not the culture. You are the steward,” Quarles says. “What you choose to reward will set the culture. And know this: Culture is a self-preserving organism. It wants to protect itself. So be intentional about what is safe and not safe at your company.”
- Find and encourage truth-tellers. “Everyone lies to you when you’re a CEO. Not in a bad way, but they’re going to give you their varnished version of the truth. I would skip, skip, skip levels down to try to understand how to get truth-tellers. Build a mosaic through anecdotal evidence from truth-tellers. Then spend time looking at the data. From there, opportunities are often very evident,” Quarles says.
“Culture is not free lunch and foosball tables. It’s how people make decisions when you’re not in the room. Culture is the force multiplier for your business.”
In Conclusion
Companies have two phases — first, finding product-market fit, secondly, hitting the ceiling of growth. To grow beyond that “invisible asymptote,” you must break. Lean into the breaks. Empower people to find them by not burdening them with the expectation that they also fix them. Surface everything that goes wrong and use it as a signal and opportunity for hypergrowth. Your managers and executives will change as your organization grows, so question your organizational and communication structure and makeup at each curve in the road. Be sure to empower everyone with a strong vision that you articulate over and over. Steward a culture that isn’t just about you, but about a greater purpose that employees bought into. Make being wrong safe.
Watch the full keynote presentation by Christa Quales below.
